<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended March 31, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 0-2908
GTE NORTHWEST INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 91-0466810
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
600 Hidden Ridge, HQE04B12 - Irving, Texas 75038
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code 214-718-5600
(Former name, former address and formal fiscal year, if changed since last
report)
The registrant, a wholly owned subsidiary of GTE Corporation, meets the
conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and
is therefore filing this form with reduced disclosure format pursuant to
General Instruction (H) (2).
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
The Company had 17,920,000 shares of no par value common stock outstanding at
April 30, 1996. The Company's common stock is 100% owned by GTE Corporation.
<PAGE> 2
PART I. FINANCIAL INFORMATION
GTE Northwest Incorporated and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1996 1995
----------- ----------
(Thousands of Dollars)
<S> <C> <C>
Revenues and sales:
Local services $ 100,415 $ 91,940
Network access services 88,480 87,545
Toll services 29,951 29,373
Other services and sales 28,036 22,874
----------- ----------
Total revenues and sales 246,882 231,732
----------- ----------
Operating costs and expenses:
Cost of services and sales 91,378 84,806
Selling, general and administrative 25,798 38,062
Depreciation and amortization 49,664 51,424
----------- ----------
Total operating costs and expenses 166,840 174,292
----------- ----------
Operating income 80,042 57,440
Other expenses:
Interest - net 12,525 13,544
Other - net 182 --
----------- ----------
Income before income taxes 67,335 43,896
Income taxes 23,848 15,354
----------- ----------
Net income $ 43,487 $ 28,542
=========== ==========
</TABLE>
Per share data is omitted since the Company's common stock is 100% owned by GTE
Corporation (GTE).
See Notes to Condensed Consolidated Financial Statements.
1
<PAGE> 3
GTE Northwest Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars in Millions)
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1996 1995
-------- --------
<S> <C> <C>
Net income $ 43.5 $ 28.5
</TABLE>
Net income increased 53% or $15 for the three months ended March 31, 1996,
compared to the same period in 1995. This increase is primarily due to higher
revenues and sales and lower operating costs and expenses.
REVENUES AND SALES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1996 1995
--------- ---------
<S> <C> <C>
Local services $ 100.4 $ 91.9
Network access services 88.5 87.5
Toll services 30.0 29.4
Other services and sales 28.0 22.9
--------- ---------
Total revenues and sales $ 246.9 $ 231.7
</TABLE>
Total revenues and sales increased 7% or $15.2 for the three months ended March
31, 1996, compared to the same period in 1995.
Local service revenues increased 9% or $8.5 for the three months ended March
31, 1996, compared to the same period in 1995. The number of switched access
lines increased 5% for the three months ended March 31, 1996, which generated
$3.3 of additional revenues. The increase also reflects a $3.6 growth in sales
of CentraNet(R) and custom calling features, such as SmartCall(R).
Network access service revenues increased 1% or $1 for the three months ended
March 31, 1996, compared to the same period in 1995. Minutes of use increased
11% for the three months ended March 31, 1996, which generated $5.3 of
additional revenues. The increase was partially offset by a $2.7 decline in
revenues reflecting the net effect of the May and August 1995 interstate rate
changes associated with THE FCC price cap and $1.7 of lower Universal Service
Fund support payments.
Toll service revenues increased 2% or $0.6 for the three months ended March 31,
1996, compared to the same period in 1995. The increase is primarily due to
favorable toll settlements recorded in the first three months of 1996,
partially offset by lower toll volumes resulting from 10XXX intraLATA toll
competition.
Other services and sales increased 22% or $5.1 for the three months ended March
31, 1996, compared to the same period in 1995, primarily reflecting a growth of
$4.6 in private branch exchange phone system sales and the associated
maintenance contracts.
2
<PAGE> 4
GTE Northwest Incorporated and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OPERATING COSTS AND EXPENSES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1996 1995
--------- ---------
<S> <C> <C>
Total operating costs and expenses $ 166.8 $ 174.3
</TABLE>
Total operating costs and expenses decreased 4% or $7.5 for the three months
ended March 31, 1996, compared to the same period in 1995. The decrease is
primarily due to a $3.8 decrease in access charges incurred by the Company to
terminate its customers' intraLATA toll calls outside of the Company's service
territory as a result of lower toll volumes. The decrease is also attributable
to lower labor and benefit costs of $3.6 associated with ongoing cost-reduction
programs from process re-engineering activities, a $3.1 settlement gain
recorded in the first quarter of 1996 which resulted from lump-sum payments
from the Company's pension plans and a $1.8 decrease in depreciation expenses.
These decreases are partially offset by $2.2 of increased digital software
amortization and $2.9 of higher material costs.
INCOME TAXES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1996 1995
-------- --------
<S> <C> <C>
Income taxes $ 23.8 $ 15.4
</TABLE>
Income taxes increased 55% or $8.4 for the three months ended March 31, 1996,
compared to the same period in 1995, primarily due to a corresponding increase
in pretax income.
OTHER MATTERS
In connection with the re-engineering plan, during the first three months of
1996, costs of approximately $10 have been incurred, including $7.4 to
re-engineer customer service processes and $2.6 to re-engineer administrative
processes. Since the plan's inception at the beginning of 1994, costs of
approximately $70.7 have been incurred, including $49.5 to re-engineer customer
service processes and $10.1 to re-engineer administrative processes. The
restructuring costs also include $11.1 to consolidate facilities and
operations and other related costs. These expenditures were primarily
associated with the closure and relocation of various service centers, software
enhancements and separation benefits associated with employee reductions.
Implementation of the re-engineering plan is expected to be substantially
completed by the end of 1996. As of March 31, 1996, $54.3 remains in the
restructuring reserve which management believes is adequate to cover future
expenditures.
In 1996, GTE, through a separate subsidiary, began offering long distance
service to its customers in selected states, including Washington, marketed
under the name GTE Easy Savings Plan(SM). GTE plans to offer this service in
all 28 states where it currently offers local telephone service by December
1996.
The Company submitted its 1996 annual interstate access filing on April 2,
1996, utilizing the FCC's interim price cap rules. In doing so, the Company
changed its productivity factor from 4.0% to 5.3% for its Washington (GTE)
tariff entity. Overall, the proposed rates result in a $1 price reduction,
effective July 1, 1996. The Company anticipates the FCC will issue an order
prior to the effective date, which may require changes to the Company's annual
filing.
3
<PAGE> 5
GTE Northwest Incorporated and Subsidiary
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------ ------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary investments $ 24,544 $ 16,310
Receivables, less allowances of $13,554 and $13,268 213,778 213,470
Inventories and supplies 14,065 11,882
Deferred income tax benefits 11,039 14,626
Other 7,982 6,677
------------ ------------
Total current assets 271,408 262,965
------------ ------------
Property, plant and equipment, at cost 3,139,231 3,118,259
Accumulated depreciation (1,955,668) (1,924,141)
------------ ------------
Total property, plant and equipment, net 1,183,563 1,194,118
------------ ------------
Other assets, primarily employee benefit plans 58,389 50,679
------------ ------------
Total assets $ 1,513,360 $ 1,507,762
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Short-term obligations, including current maturities $ 183,882 $ 48,994
Accounts payable 88,374 87,118
Taxes payable 49,132 31,164
Accrued interest 12,539 10,008
Accrued payroll costs 26,827 27,220
Dividends payable 57,017 19,140
Accrued restructuring costs 54,322 64,315
Other 59,579 57,354
------------ ------------
Total current liabilities 531,672 345,313
------------ ------------
Non-current liabilities:
Long-term debt 507,923 684,017
Deferred income taxes 21,974 18,789
Other liabilities 58,234 52,556
------------ ------------
Total non-current liabilities 588,131 755,362
------------ ------------
Shareholder's equity:
Common stock (17,920,000 shares issued) 448,000 448,000
Additional paid-in capital 57,671 57,671
Retained earnings (deficit) (112,114) (98,584)
------------ ------------
Total shareholder's equity 393,557 407,087
------------ ------------
Total liabilities and shareholder's equity $ 1,513,360 $ 1,507,762
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 6
GTE Northwest Incorporated and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
1996 1995
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
Operations:
Net income $ 43,487 $ 28,542
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 49,664 51,424
Deferred income taxes 6,772 8,213
Provision for uncollectible accounts 3,773 3,768
Changes in current assets and current liabilities 7,278 34,953
Other - net (3,993) 10,994
----------- -----------
Net cash from operations 106,981 137,894
----------- -----------
Investing:
Capital expenditures (38,515) (47,843)
Other - net 344 16
----------- -----------
Net cash used in investing (38,171) (47,827)
----------- -----------
Financing:
Long-term debt retired (1,339) (11,772)
Dividends (19,140) (10,709)
Decrease in short-term obligations, excluding current maturities (40,097) (49,300)
----------- -----------
Net cash used in financing (60,576) (71,781)
----------- -----------
Increase in cash and temporary investments 8,234 18,286
Cash and temporary investments:
Beginning of period 16,310 953
----------- -----------
End of period $ 24,544 $ 19,239
----------- -----------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 7
GTE Northwest Incorporated and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) The unaudited condensed consolidated financial statements included herein
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, in the opinion of management
of the Company, the condensed consolidated financial statements include all
adjustments, which consist only of normal recurring accruals, necessary to
present fairly the financial information for such period. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and the notes thereto included in the Company's 1995
Annual Report on Form 10-K.
(2) The Company anticipates refinancing $175 million of commercial paper on a
long-term basis during the second quarter of 1996.
During 1995, the Company entered into forward contracts to sell $175 million of
U.S. Treasury bonds in order to hedge against future changes in market interest
rates related to the debt the Company called and redeemed in the fourth quarter
of 1995, and anticipates issuing during the second quarter of 1996. Any gain
or loss recognized upon the expiration or settlement of the forward contracts
will be amortized over the life of the associated refinanced debt as an offset
or addition to interest expense.
(3) Reclassifications of prior year data have been made, where appropriate, to
conform to the 1996 presentation.
6
<PAGE> 8
GTE Northwest Incorporated and Subsidiary
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
12 Statement re: Calculation of the Consolidated Ratio of Earnings
to Fixed Charges
27 Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the first quarter of
1996.
7
<PAGE> 9
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GTE Northwest Incorporated
--------------------------------
(Registrant)
Date: May 13, 1996 William M. Edwards, III
------------------------------ --------------------------------
William M. Edwards, III
Controller
(Principal Accounting Officer)
8
<PAGE> 10
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------------- ------------------------------------------------------------------------------------
<S> <C>
12 Statement re: Calculation of the Consolidated Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 12
GTE Northwest Incorporated and Subsidiary
STATEMENT OF THE CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
1996
-----------
<S> <C>
Net earnings available for fixed charges:
Income from continuing operations $ 43,487
Add - Income taxes 23,848
- Fixed charges 13,819
-----------
Adjusted earnings $ 81,154
-----------
Fixed charges:
Interest expense $ 12,821
Portion of rent expense
representing interest 998
-----------
Adjusted fixed charges $ 13,819
===========
RATIO OF EARNINGS TO FIXED CHARGES 5.87
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 24,544
<SECURITIES> 0
<RECEIVABLES> 227,332
<ALLOWANCES> 13,554
<INVENTORY> 14,065
<CURRENT-ASSETS> 271,408
<PP&E> 3,139,231
<DEPRECIATION> 1,955,668
<TOTAL-ASSETS> 1,513,360
<CURRENT-LIABILITIES> 531,672
<BONDS> 507,923
<COMMON> 448,000
0
0
<OTHER-SE> (54,443)
<TOTAL-LIABILITY-AND-EQUITY> 1,513,360
<SALES> 246,882
<TOTAL-REVENUES> 246,882
<CGS> 91,378
<TOTAL-COSTS> 166,840
<OTHER-EXPENSES> 182
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,525
<INCOME-PRETAX> 67,335
<INCOME-TAX> 23,848
<INCOME-CONTINUING> 43,487
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,487
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
